Beware of Generalities

Talking heads and pundits everywhere are quick to make predictions based on broad generalities. Many investors respond by making changes to their portfolio. Doing so isn’t always in your best interest. Let me explain why. Generalities, by their nature, deal with broad segments. For instance, financial experts have been talking so much about the popping of the Real Estate Bubble that it may become a self-fulfilling prophecy. Based on questions from readers, investors are now concerned about all things real estate. That’s where the problem lies. It may be true that there is a Real Estate Bubble of sorts. But that doesn’t necessarily mean that all real estate investments are destined to drop in value. There are many ways to invest in real estate besides buying an actual property. There are publicly traded real estate investment trusts (REITs), direct participation programs and stocks of homebuilding companies and materials providers such as Home Depot. Before you make changes to your real estate investments, you must first dig deeper to better understand what is happening and what the specific effects will be. Based on your research, it may be best to shift funds from one type of real estate investment to another. When the media talks about the Real Estate Bubble, they are really talking about the collapse of prices on single-family homes. It’s true that the demand for homes has surged the last 5 years due to abnormally low interest rates. Just about anyone who was paying rent could own a home for the same monthly payment. Those with existing homes (and mortgages at a higher rate of interest) were able to sell and purchase larger homes while maintaining a similar monthly payment. The result of this surge in demand was that home prices went up. As people heard about the remarkable gains real estate investors were earning, they decided to jump into the game. The numbers of vacation homes and second homes being purchased soared, further inflating prices. People who had never invested in real estate were suddenly trying to flip properties. Higher interest rates are letting the air out of that bubble. It is taking longer and longer for a home to sell. Prices are coming down. Sure, there will be some areas where people paid too much for a home and will have to wait years before they can sell at a profit, but I don’t believe there will be a crash like investors experienced in the Tech Stock Boom. It’s just that our homes won’t appreciate as fast. Here’s the point. Not all real estate will decline. During this rush to purchase homes, rental properties went down in value. No one wanted to rent, everyone wanted to buy. Landlords had to offer extravagant incentives. They had to lower rents and include freebies—much like home sellers are doing now. So while it was a great time to invest in single-family homes, it was a terrible time to own rental property. Likewise, as the single-family market reached its peak it was time to shift investment dollars into rental properties. Demand for rentals is increasing. Rents are rising. Profits are returning. For instance, I have invested my clients in one company in this niche. It focuses on acquiring, owning and operating apartment communities mainly in the southeastern United States. Even after a recent pullback it is still up over 13% year-to-date. And its dividend yield is currently 4.4%. If you moved money out of all types of real estate based on the Real Estate Bubble generalities hyped by the media, you missed opportunities. I believe real estate should be a normal part of any portfolio, just like domestic and international stocks and bonds. Real estate doesn’t move in tandem with stocks, so it helps level out the ups and downs of the market. Investing takes work. There aren’t any short cuts. Taking action based on broad generalities is a loser’s game. By drilling down through the hype to understand the specifics, you can make adjustments to your portfolio that will reduce your risk while allowing you to continue to grow your wealth or achieve a higher level of income. If you aren’t interested in doing that work, you might consider someone like me to do it for you. I’ll personally respond to your questions, free of charge. Go to http://www.guardingyourwealth.com and click on ‘Ask Jeff’. In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide.